Will Proposition 13 ever be changed?

Voters warm to the idea of reforming Proposition 13, but large financial interests would vigorously oppose any attempts to curtail their subsidy.

Property taxes have long been a source of local government tax revenues because real property cannot be moved out of a government’s jurisdiction, and values can be estimated by an appraisal, so it’s a convenient item to tax. In most states, local governments add up the cost of running the government and divide by the total property value in the jurisdiction to establish a millage tax rate. California is forced to do things differently by Proposition 13 which effectively limits the appraised value and total tax revenue from real property, forcing local governments to find revenue from other sources. Proposition 13 limits the tax rate to 1% of purchase price with a small inflation multiplier allowing yearly increases.

Proposition 13 tends to limit move-up trading because it requires owners to increase their property tax bill, sometimes dramatically. There are basis transfers and ways around this problem for certain people who qualify, but there is a documented tendency among California home owners to stay in their homes because they end up trapped there by the tax savings. This Wikipedia article has a good discussion of the impact of Proposition 13.

California’s Ballot Initiative System

Realistically, the only way to reform Proposition 13 is by ballot initiative. It’s very unlikely legislators would have the courage to reform the law, assuming they saw reason to do so. According to Wikipedia:

Laws already adopted by the state legislature may be vetoed by means of a referendum. To qualify a referendum for inclusion on the ballot, a referendum petition must have been signed by at least five per cent of the number of voters in the previous gubernatorial election. This is also known as a “petition referendum” or “people’s veto”.

People could vote to amend Proposition 13, but it would be an uphill battle. One of my fellow bloggers (his site is on my blogroll) makes his living as a political consultant who specializes in ballot initiatives. I talked with him about the process and his work, and one thing he told me always stuck in my mind: it’s very difficult to pass a ballot initiative if moneyed interests are on the “no.”

Any attempt to reform Proposition 13 would have big-money opponents. Who would you guess? Homeowners wanting to preserve a good deal? Nope. The big money on the “no” would be commercial properties owners and their various organizations — and they will spend whatever it takes to convince homeowners to vote with them to kill any reforms.

SACRAMENTO >> Proposition 13’s restrictions on property tax growth have been untouchable in California politics for almost 40 years, but a new Field Poll shows about half of voters are open to tweaking the landmark measure.

Asked in a general way if they favor making some changes, 49 percent of registered voters said they supported the idea, while 34 percent are opposed, the poll found.

If you polled voters in the Bible Belt, a very high percentage would favor some form of prayer in public schools; however, if asked to vote on a specific prayer, the majority consensus quickly breaks down into quibbling factions. It would be similar to any attempt to change Proposition 13. Voters may realize it’s a problem, but they have no consensus on how to solve it.

Deciding how to alter California’s rigid tax rules is the multimillion-dollar question. The Field Poll found far less consensus around a proposal to reduce the threshold needed to boost local taxes from a two-thirds majority to 55 percent. Only 39 percent of voters said they support that idea, and Republicans are strongly opposed, with 67 percent disapproving.

“Proposition 13 is not as sacrosanct as it had been in the past,” said Carl Stempel, a California State University East Bay professor who helped write the poll. “California has so many more younger voters today, and they don’t have the same historical memory as the older generation.”

Prop. 13 enshrined an anti-tax mentality in California law when it passed with 65 percent of the vote in 1978, slashing property taxes and limiting the ability of politicians and even voters to raise taxes of all types. Advocates say it has helped keep California affordable for residents and businesses, but critics say it has starved government for money, leading in particular to a decline in the quality of the state’s schools.

In recent years more than half a dozen plans to alter Proposition 13 in some way have all failed, in part because of strong opposition in the business community and advocacy groups like the Howard Jarvis Taxpayers Association. Jon Coupal, the group’s president, said keeping property taxes low for businesses is important because higher levies always “hit the pocketbooks of consumers and tenants,” too.

This is clearly an example of advocates being self-serving liars and opponents pointing out the truth. Higher tax levies on businesses and commercial properties does not hit the pocketbooks of consumers. The free market for goods and services determines how much consumers will pay for anything; businesses can’t pass their costs on to consumers. Businesses may decide not to operate, but none will pass costs on to consumers.

The reality is that Proposition 13 benefits owners of commercial properties at the expense of everyone else. Because property taxes are held at 1970s levels on commercial properties, the net operating income is higher than it othewise would be. This in turn prompts buyers to pay more to own the property and inflates its value. Proposition 13 is a hidden tax subsidy that increases the income and wealth of commercial property owners.

In February, Assemblyman Tom Ammiano introduced a bill to close what he calls a loophole in state law that allows commercial property buyers who take a less than 50 percent stake in the ownership to avoid having the property reassessed at market rate. Under his bill, any sale, no matter how many new owners are involved, would trigger reassessment and a higher tax.

This is common sense reform that should be done; however, with commercial property owners on the “no”, the negative ads full of lies and half-truths will likely defeat this bill. Despite the fact the text explicitly states it only applies to commercial properties, the political consultants would undoubtedly run ads trying to scare old people with threats of skyrocketing property taxes leading to foreclosure and eviction.

A decade ago, wine company E&J Gallo avoided a higher reassessment in buying a 1,765-acre Napa County vineyard when a dozen Gallo family members bought shares of the property­ — none greater than 50 percent. The move costs Napa County at least $700,000 a year in lost property taxes.

In one interesting example of consensus, the poll found a strong majority of both Democrats and Republicans support changing Proposition 13 to force business properties, just like houses, to be reassessed when they are sold. More than 7 in 10 Democrats (71 percent) and nearly two in three Republicans (64 percent) reported supporting such a change, similar to the one Ammiano hopes to enact this year.

Two questions for today:

1. Do you think Proposition 13 should be amended to reassess commercial properties when owners change?

2. Do you think any change to Proposition 13 could be passed by ballot initiative? Why or why not?

55 responses to “Will Proposition 13 ever be changed?”

Actually, the people that want to repeal prop 13, or as much of it as possible, are the public employee unions, who live of tax payer dollars. Once the public find out they would be the main beneficiaries of a prop 13 repeal, prop 13 will stay.

Agreed. Prop 13 is a necessity in a liberal state like California. Maybe in a conservative state people can trust government to self-limit spending and collect less property taxes but in a liberal state that will never happen. For example New Jersey property taxes are close to 2% of the assessed value. The commercial exemption for property transfers should be removed though. It’s only fair to play by the same rules for both residential and commercial owners.

Orange County is full of retired people living in houses with no mortgage, paying property taxes on a pre 1978 cost basis (+1% annually). I’m definitely not favor of making old people sell the family home, but I am in favor of making them pay the same amount in property tax as their neighbors. This has nothing to do with being liberal, conservative, democrat, republican or even libertarian, and everything to do with equal representation.

I don’t like taxes, and think they’re way too high in California, however it’s fundamentally wrong to charge a higher rate on the same property to a younger person.

“Lee in Irvine”…..exactly how many properties in Orange County are actually paying pre 1978 taxes? What is your source of information? How about all the commercial properties that never had a change of taxation due to manipulation of ownership rules?

I imagine there are many residential properties that haven’t changed hands since the late 1970s, but as you noted, the far larger problem is the commercial properties that structured their ownership and transfer to preserve their late 70s tax basis. All the commercial people set this up.

The problem with Prop 13 is it’s success in keeping retirees in their working homes. Why is this bad? Well, when you decided to buy your home I assume you chose it because of its reasonably close proximity to your job, good schools, shopping etc.

Once you retire, the person taking over your job is looking for the same house in the same area. If no houses are available, where is that person going to live? They are either going to commute longer distances, which is bad for traffic, polution, family life, etc.; they are going to relocate out-of-state; or the company is going to relocate out-of-state for lack of qualified workers – reducing income tax revenue, and lowering property values with loss of non-fixed-income jobs.

And since Prop 13 results in the majority of taxes being paid by new homeowners, property taxes reduce the amount buyers can pay. So the retirement nest egg is that much smaller thanks to Prop 13.

The problem in the 70s wasn’t just with rising property taxes, the problem was the rising government expenditures that necessitated the rising taxes. Income and sales taxes have kept rising despite the cap on property taxes.

From a generational perspective, taxes have risen on the younger generations who have more goods to purchase, as they are just starting out, and rising income tax burdens as they progress in their careers. They also have rising expenses as they start families and buy homes to live in and cars to transport them even greater distances from home to work. On top of this, they have to pay three times the amount of property taxes as their neighbor who has no mortgage!

I don’t think the answer is to scrap Prop 13 altogether, there needs to be some limit on government revenue. I just think that it shouldn’t matter if you have lived in a house for 30 years or 30 days, the tax bill should be the same. By the time you are retired, you shouldn’t have a mortgage anyway. That will allow you to afford the taxes. If not, maybe you can find a smaller home that is more affordable and requires less upkeep. There shouldn’t be a disincentive to a retiree selling a home they can no longer maintain.

And I forgot to mention, the fixed income of today’s retirees is something following generations can only dream of. This fixed income comes from public or private pensions we won’t have, or social security that is reducing our current take home pay, and we probably won’t have that either.

The only fixed income we are likely to get is from investments. But the returns on these investments are impacted by the amount of money these companies have to pay into their underfunded retirement programs for employees that currently retired, or soon will be.

If you are looking for sympathy for being on a fixed income, look somewhere else. Retirement for future generations looks like a fixed income of precisely zero – or no retirement.

In order to arrive at a solution, you have to identify the problem, or problems at the root. What you call blaming I call assigning responsibility to those responsible for creating, or profiting from, inter-generational inequities. It is patently unfair to levy a heavier tax burden on a younger generation that doesn’t have the wealth of the older generation.

The solution is to make those who paid too little pay more, and to refund the amount overpaid by those who have paid too much. And to make sure going forward that a $3M house doesn’t have the same property tax liability as a $500k house. Why should a wealthy retiree with no mortgage have the same tax bill as a struggling two-income, two-kid family that is crammed in a house that is one-third the size? The hypocrisy is breathtaking.

“You know what happens in an engine when you get too much friction and the car just doesn’t rev as fast? Its one of those friction based arguments rather than a ‘catastrophic change’ based arguments. What I’m saying is that there is so much friction here; the friction from the regulators, the friction from the lenders, friction from the borrowers (median incomes aren’t going up, coming up with down payments are tough, they aren’t sure the house is priced correctly) every one of those reasonable propositions is a source of friction,” Showalter said.

“The investors are gradually leaving the market as prices rise, and the retail buyer is waiting in the wings. There are some markets, like Miami and San Francisco, that are driven by outside factors, but markets like St. Louis and Omaha and parts of California and Nevada that aren’t driven by structural factors that are unique and powerful, they are going to suffer the friction as the retail buyer struggles to get back into the marketplace,” Showalter said.

What are the seven dynamics that Fitch says will shape the housing market through the rest of 2014?

1) Lack of Momentum

Comparisons are challenging through first-half 2014, and so far this year most housing metrics seem to have defied expectations and fallen somewhat from a year ago. Though the severe winter throughout much of North America has restrained some housing activity, nonetheless, there is an absence of underlying consumer momentum this spring, perhaps due to buyer sensitivity to home prices and finance rates and the slowing of job growth at year end.

2) Recovery Supports Ratings, Likely Some Upgrades

Fitch Ratings expects stable ratings for most issuers within the homebuilding sector in 2014, reflecting a continued, moderate, cyclical improvement in overall construction activity during the year. Of course, financial performance will vary among issuers, reflecting customer, geographic and product strengths. However, there is the potential for a few upgrades.

3) Public Builders Continue to Outperform

Generally, the major public builders realized much stronger operating results, year over year, during fourth-quarter 2013 and, for the full year, they gained market share. On average, fourth-quarter net orders were down 1.7%. The unit backlog typically improved 8.5% (22.6% on a dollar basis). The implied price in backlog grew 12.8%, largely due to price increases.

4) 2014 Volume Should Increase Moderately

Housing metrics should improve in 2014 due to faster economic growth, and some acceleration in job growth, despite somewhat higher interest rates, as well as more measured home price inflation. However, we are tapering our forecast to reflect the subpar spring selling season. Single-family starts are now projected to improve 15% to 710,000 as multifamily volume grows about 9% to 335,000. Thus, total starts this year should top 1 million. New home sales are forecast to advance about 16% to 500,000, while existing home volume is flat at 5.10 million, largely due to fewer distressed homes for sale.

Demand will continue to be affected by narrowing of affordability, diminished but persistent and widespread negative equity, challenging mortgage-qualification standards and lot shortages. As Fitch has noted in the past, the recovery will likely remain fitful.

7) Caution on Land Spend and Liquidity

The improving economy warrants reasonable optimism on the part of builders, but some restraint should be exercised as to excessive new land purchases and meaningful depletion of liquidity in these still-uncertain times.

The median sales price of used homes hit $198,500 in March, up 7.9% from the year-earlier period. March’s inventory was 1.99 million existing homes for sale, a 5.2-month supply at the current sales pace.

The Federal Housing Finance Administration separately reported that U.S. house prices rose in February, with an increase of 0.6% on a seasonally adjusted basis from the previous month.

The FHFA’s measure is for February and considers different metrics and data sets than the NAR’s, which is for March. The FHFA HPI is calculated using home sales price information from mortgages either sold to or guaranteed by Fannie Mae and Freddie Mac. From February 2013 to February 2014, house prices were up 6.9%.

The 0.1% decrease in November 2013 ended a 21-month trend of price increases that had begun in February 2012. The previously reported 0.5% increase in January was revised downward to 0.4%.

“From a regional standpoint, sales were weak in the South and West, down 3.0% and 3.7%, respectively. Sales in the Midwest and North, on the other hand, were up 4.7% and 9.1%, respectively,” noted Sterne Agee chief economist Lindsey Piegza. “Bottom line, demand for housing remains uneven after months of heightened sales activity earlier in 2013. Now against the backdrop of minimal income growth and a still-tepid labor market, demand continues to wane.

“For potential homebuyers, rising prices are eroding affordability, putting further downward pressure on consumer’s ability and willingness to finance a home purchase. From the owner’s perspective however, rising prices are helping to create and maintain a wealth effect, fueling (or at least helping to support) consumer spending,” she said.

NAR chief economist Lawrence Yun said that current sales activity is underperforming by historical standards.

“There really should be stronger levels of home sales given our population growth,” he said. “In contrast, price growth is rising faster than historical norms because of inventory shortages.”

No doubt prop taxes in Calif are headed up simply because it will turn out that the $trillions pumped into the massive price-levitation/paper gains(LOL) scheme will actually have to be paid back by those who ‘theoretically’ benefitted from it the most.

Sorry, but you are comparing new home sales and relating it to an argument yesterday about existing home sales. As Larry has pointed out many, many times, new home sales are captured at contract signing, whereas existing sales are captured at closing. That means existing sales would have been affected by the horrendous weather in January/February because that’s when March closings would have been signed. New home sales signed in March would have only been affected by March weather.

Uh… ZH’s post/awgee’s post pertain to NEW HOME sales reported today, NOT an argument from another day or existing home sales, yet you chose to insert an argument from another day/existing home sales into a discussion about new home sales reported today.

Thus, in essence, you are spinning–not the data–but the narrative the exact same way that you usually do.

awgee is referencing a conversation about the effect of snow on home sales from yesterday. He specifically addressed one of the participants of that discussion, so my response is also in the context of that discussion.

el O – When I posted it, I had no idea what type of home sales it was referring to. I just find it funny that when things do not turn out the way some people expect, they find any stupid excuse for rationalizing why they were wrong.

“It was the weather.”
“It was the number of days in the month.”
“It was an adjustment.”
“It was a joke. I did not mean it.”
“You are dumb if you do not agree with me.”

The reason new home contracts increased 12.5% in the NorthEast is because the weather was horrible in February, but greatly improved in March. Otherwise, the NorthEast would have mirrored the rest of the US, which saw a 14.5% decline.

Russia sold $105 billion of US Treasuries into the market about a month ago. According to the Fed, Belgium bought all of that and an extra $51 billion to boot. Do you think Belgium had $156 billion dollars laying around and decided to buy US Treasuries?

If you say that I have no proof that the Fed gave Belgium the money in a swap, you are correct, but just because I am a bit slow doesn’t mean I can not observe the obvious. I don’t search out information to bolster my presuppositions. I just read the Federal Reserve’s report on foreign holders of US Treasuries.

How do you think Belgium came up with $156 billion dollars? Belgium has a gdp of just over $500 billion per year. Please, how do you think Belgium came up with $156 billion dollars? In under a month? Some other country so desperate that interest rate on US Treasuries not shoot up, that some country loaned Belgium the money?

By the way, before that, it was the UK, and “Caribbean banking centers” who were buying billions in US Treasuries. Who benefits from the purchase of hundreds of billions of US Treasuries? Who has the most to gain? China ain’t buying anymore. Russia is selling. Are you one of those folks who a few years ago were proclaiming that China could never stop buying US Treasuries? A few months ago, China was a net seller for months. And yet, someone keeps buying them, and that someone is responsible for keeping treasury interest rates low.

I don’t need to rationalize. I just look at what is there.

“You will continue to be wrong as long as you look at the possibilities through the lens of desire rather than the harshness of reality.”

Sales of new single-family homes in March plummeted 14.5% to a seasonally adjusted annual rate of 384,000, hitting the lowest level since July 2013, the U.S. Census Bureau reported Wednesday.

The March drop in new home sales was a year-over-year drop of 13.3%. The report showed there were drops in three of four U.S. regions.

The March results were well below analyst expectations. The report can be read here.

Home sales have been tepid in market facing rising interest rates, investor-driven home price increases, declining inventory, a rising affordability gap and the much tighter lending standards imposed on the industry.

“Another disappointing home sales report on the heels of yesterday’s decline in existing home sales activity. As we noted yesterday, rising prices are becoming problematic,” said Sterne Agee chief economist, Lindsey Piegza. “While fueling existing homeowners’ confidence with a sizable wealth effect, declining affordability is squeezing many potential home buyers out of the market. Without income growth or sizable savings to offset the cost increase, home sales are likely to remain tepid, at least in the near term.”

Sales did pick up in the Northeast region, while falling in the three much larger regions.

Home prices continued to climb through March, rising to a median price of $290,000, up 12.6% from March 2013.

“The sharp decline in March’s new home sales is further evidence that winter weather is not the catalyst for the sluggish housing data the past few months,” Quicken Loans vice president Bill Banfield. “The rise in interest rates and prices of new homes is leaving some potential buyers with sticker shock and ultimately prolonging their home search process.”

The new home supply is at six months given the March sales pace, which is up from five months supply in February.

Wednesday’s report comes as the latest bit of bad news for the housing industry.

The Mortgage Bankers Association notes that mortgage applications are down 16% from this time last year, and mortgage activity is actually at its lowest level since 1997. Mortgage originations in general are at a 14-year low according to Black Knight Financial Services.

Housing starts in March rose less than expected and much less than expected given the supposed demand pent up from the bad weather in January and February.

After rising last week slightly to break a streak of four weeks of straight declines, mortgage applications dropped 3.3%, according to the Mortgage Bankers Association’s weekly mortgage applications survey for the week ending April 18.

The Market Composite Index, a measure of mortgage loan application volume, decreased 3.3% on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index decreased 3% compared with the previous week.

The Refinance Index decreased 4% from the previous week. The seasonally adjusted Purchase Index decreased 3% from one week earlier. The unadjusted Purchase Index decreased 2% compared with the previous week and was 18% lower than the same week one year ago.

The refinance share of mortgage activity decreased to 51% of total applications from 52% the previous week. The adjustable-rate mortgage share of activity increased to 9% of total applications. The average loan size for purchase applications has reached its highest level in the history of the survey at $280,500, coinciding with the trend in rising purchase activity for larger loan amounts.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) increased to 4.49% from 4.47%, with points increasing to 0.50 from 0.32 (including the origination fee) for 80% loan-to-value ratio (LTV) loans. The effective rate increased from last week.

The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances (greater than $417,000) increased to 4.41% from 4.39%, with points increasing to 0.34 from 0.18 (including the origination fee) for 80% LTV loans. The effective rate increased from last week.

The average contract interest rate for 30-year fixed-rate mortgages backed by the FHA increased to 4.20% from 4.14%, with points increasing to 0.41 from 0.06 (including the origination fee) for 80% LTV loans. The effective rate increased from last week.

The average contract interest rate for 15-year fixed-rate mortgages increased to 3.55% from 3.54%, with points increasing to 0.33 from 0.24 (including the origination fee) for 80% LTV loans. The effective rate increased from last week.

The average contract interest rate for 5/1 ARMs increased to 3.16% from 3.15%, with points decreasing to 0.36 from 0.41 (including the origination fee) for 80% LTV loans. The effective rate decreased from last week.

Since we know that incomes are not rising (no inflation), positive home selling activity is limited to cheaper interest rates and more liberal financing. Interest rates are up YoY, and more liberal financing is yet to appear, therefore organic home sales will decline. This is what keeps the FOMC us at night.

The old days of selling at an ever higher home price are about to be challenged. It’s really going to become interesting as it becomes MUCH MORE apparent that this economy cannot sustain without QE. And since we know that QE has not increased incomes and has lesser of an economic impact, it will take even MORE QE to keep this Ponzi scheme going. Looks something like this:

“Albert Cheng reaffirms the paradigm shift for the gold market that is Chinese gold demand. He points out two very important facts hitherto not known by market participants. First is that there are now over 100,000 gold bullion dealers selling coins and bars in China. Secondly, he says this suggests that the majority of banks are now offering gold bullion products over the counter.”

The US has a plethora of “Cash for Gold” stores that according to some is a sign that gold is or was a bubble asset. In China there are a 100,000 outlets selling gold and one can buy gold at a bank also. The US is selling it’s gold and China is buying. Not shown in this article is that Chinese gold sales increase when the price goes down.

When identifying a bubble in an asset price, does one look at the timing of sales relative to the price? My understanding, as minuscule as that may be, is that one of the identifying factors of a bubble asset is that Joe 6-pack buys more and more as the price goes up, not down. Isn’t that where our chiding of the phrase, “Buy now or be priced out forever”, comes from? What does it mean when Wong 6-pack buys on the dips?

It turns out that Irvine is not the only thing that the Chinese are buying.

A simple correlation rule of thumb allows us to predict that gold will be at $1,950 by the end of the year if it simply retains it close correlation to the debt ceiling. Should Bernanke announce that he will additionally need to monetize some or all of this incremental debt amount, we anticipate that gold will be well over $2,000 by the end of the year, courtesy of yet another round of accelerated dollar debasement, which also means that real gains in US stocks will be negated courtesy of the devaluation of the currency in which they are priced.

Not only did ZeroHedge get the price of gold wrong, but they got stocks wrong.

It’s easy to see how people believe that gold would continue to rise. The world has done about 12 trillion in QE … Japan started in 2001. So I understand that side of the argument … however, that side of the argument is now wrong.

IMO, gold has declined for a couple of big reasons:

1) India used to be the largest purchaser of Gold, and their currency (Rupee) started weakening about the time gold rolled over, therefore making it more difficult to buy.

2) The market figured out that despite all this worldwide QE printing, there are massive secular deflationary forces that are preventing inflation.

I would also add that gold tends to rise in price when people lose faith in currency. The big rise in gold prices during the financial crisis was due to a loss of faith in our financial system and the currency that backs it.

As you noted in #2, people are figuring out that debt deflation is counteracting the inflationary aspects of QE. Plus, the economic stability over the last few years has taken away people’s fears.

The gold bugs might be right in the end. When the debt deflation finally stops, it’s likely central banks will miss the timing, and they will keep printing and stimulating until we really do have inflation. That will cause people to lose faith in the currency again, so they will buy gold.

IR, I do not believe the debt deflation will stop, without allowing the debt deflation to actually happen. The fact that the central banks are trying to stop it, only prolongs the inevitable. They cannot win. The biggest thing against them are the demographics. Not only can the central banks not win, they’ve already lost.

As long as asset values are below the debt, deflation can and does happen when borrowers default. Once asset values exceed the debt, deflation stops naturally.

Debt deflation will finally stop when the amount of debt is less than the collateral value of the assets encumbered by the debt because at that point, default and foreclosure doesn’t cause money to evaporate into thin air. It’s the main reason the federal reserve and everyone else is so focused on increasing collateral value (house prices). What’s unnatural now is what we are doing to the collateral asset value.

That’s why we know that the number one cause for default it negative equity, not personal economic conditions.

Once asset values exceed the debt, deflation stops naturally.

IMO, I don’t think deflation is gonna stop this time because the Fed is now pressed with a ZIRP, and weaker QE. The Fed has been cutting interest rates for 30+ years … they’re at the end of the road. The FED can’t continue to print more and more and more, without any true economic benefit, and ignore the consequences of future obligations.<–I think we're here right now, and that's why they have tapered. They taper was due to declining benefit, NOT economic improvement.

Debt deflation will finally stop when the amount of debt is less than the collateral value of the assets encumbered by the debt

I agree … and I think we’re gonna get there by means of the private debt declining, not the other way.

I understand that few people have any understanding of the gold culture in India and China. I understand that even fewer people have a clue as to why the price of gold moves and in which direction. But what mystifies me is the number of people who pretend they know something and then have no qualms exposing their ignorance in their writings.

Oh well, I guess that is why it will always be easy for a person of mediocre intelligence to increase their net worth. The smart people are too busy trying to show everyone how smart they are.

“1) India used to be the largest purchaser of Gold, and their currency (Rupee) started weakening about the time gold rolled over, therefore making it more difficult to buy.”

The above is not controversial. It is just plain ignorant. India officially purchased less gold last year because high import tariffs were imposed, … on gold, and gold only. Unofficially, there are tons of gold being smuggled into India, regardless of the weakening Rupee, and no one knows the real amount of gold being “imported” into India. And the reason India is not longer the largest purchaser of physical gold is because China overtook them as the largest purchaser of physical gold, including any and all years that India has been importing gold. The largest purchasers of gold, not physical, are still the bullion banks.

“The market figured out that despite all this worldwide QE printing, there are massive secular deflationary forces that are preventing inflation.”

The market figured that out? How do you know this? Did you read it somewhere? By someone who knows why the market does what it does? And has some real reason to think so? Or did you just figure this out yourself?

The LBMA and the COMEX operate on a 50:1 to a 100:1 ratio of paper ounces to physical ounces. If China buys 300 ounces, (about $10,000,000), of physical gold one day and someone sells 12,000 tonnes, (about $500,000,000,000), of gold at the Comex on the same day, do you think the price of gold in dollars will go up or down? I picked $500,000,000,000 because that was the amount that was sold on the Comex in one order on April 14th, or maybe it was the 15th.

In the short run, less than a year or two, the traders on the LBMA and the Comex determine the price. In the long run, 5 years or less, the physical gold market determines the price.

If you stuck to what you know I would respect what you are writing, but if you are going to make ignorant statements about the gold market, why should I respect your’s? Would it not be wiser to take them for what they are?

I respect IR because he writes about what he knows, questions what he does not know, and mostly because he admits when he is wrong.

Seriously, what am I supposed to think when you say something like, “It isn’t inflation unless wages are rising”? By whose definition? I have seen many folks misuse the word inflation, but do you understand that you are probably the only person who thinks that prices are not rising and the money supply is not increasing if wages are not rising?

You’re right about Gold. It’s actually a great asset class. Nothing else needs to be said about this. You’re right!

You’re right about inflation too. That’s why the Fed has a zero interest rate policy for over 5 years. They’re actually creating inflation. Houses are up, food is up, energy is up. But interest rates are DOWN … and now I know why … it’s because awgee says the Fed is actually creating inflation. Duh … I can’t believe I didn’t figure that out.

We must not forget that you are right about the Fed not really tapering, and actually buying more bonds than ever before last month. <-Now that's just kookie and conspiratorial.

Lee-
I wouldn’t worry too much about what awgee thinks. He likes to argue for argument’s sake. If he understood gold, he would have been telling people to sell in 2011, but he didn’t. He has consistently pumped gold before, during, and after the crash. That fact alone negates every post he has ever written about the barbarous metal. He is a permabull and somebody like that can’t be reasoned with.

I’m all for the repeal of Prop 13 if the state would reduce the income tax rates. That will never happens. Texas has high property taxes…duh because there are no state income taxes same for the other states. We still pay more in property taxes (amount) than folk from the other states pay for the most part. Repeal of prop 13 like the removal of interest tax deduction will cause property value to drop meaning the state could possibly collect less in tax revenue. I believe that Prop 13 has been permanently institutionalized in this state and the high income tax is the counter balance to Prop 13. Fix only one part and you will see the real estate market in this state started to act “funky” and even more people leaving and possibly rent go up as another counter balance. Unintended consequences is such a bitch. I know. But since when do politicians act with commons sense?

The author states that commercial property owners won’t pass on increased costs to renters, because they can’t. I challenge that. I have long term tenants and my policy is to let their rents fall about 10% below market if they are good tenants. You know what? The day after prop 13 protection is pulled, that’s the end of my policy. I doubt I’m alone.